FATCA Regulations (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It is one of the most important developments in years in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Essentially american expats living abroad who thought the IRS would never be able to find or track their offshore holdings will have cause to rethink this. With penalties that include severe fines or even jail time, citizens will have to consider that the new law makes it much more likely that their holdings will be discovered and reported to the IRS by the very same foreign banks that were formerly “sheltering” your money.

FATCA is in many ways, a brillliant move by the IRS. With this law, the IRS has essentially deputized foreign banks to do the work of enforcement and detection of US taxpayers hiding assets in offshore accounts. The way it works is that FATCA agreements are first worked out between the IRS and various countries. Currently this includes most European and many South American countries with more agreements being ratified every month.  Under FATCA these foreign banks are now required to report to the U.S. Internal Revenue Service (IRS) starting January 1st, 2014, a list of all their clients who are U.S. citizens. In order to do this the bank requests all their U.S clients to complete a standard W-9 form which identifies the US expat for tax purposes.  This information is then provided to the IRS. If you are a US expat you should know that refusing to complete this form can result in your bank actually freezing your accounts.

FATCA Compliance

You may find yourself asking How can the IRS get away with this? Simple. According to U.S. law, all U.S. citizens have an obligation to pay taxes on all their worldwide income including any foreign income. In addition, in cases where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year they also have to fill out Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (otherwise known as “FBAR”). This requirement applies to any financial interest including even signature authority over any foreign financial account, such as a bank account, brokerage account, mutual fund, trust, pension plan, etc.

The FBAR form must be received by the Department of Treasury in Detroit, on or before June 30th of the year following the calendar year being reported. No extensions are allowed.

FATCA Penalties

So, if you are a U.S. citizen, and you never filed U.S. tax returns, not to mention the FBAR form, AND the bank requests that you sign on form W9, you are in trouble, since not complying with your tax or FBAR duty could be considered a felony in addition to being subject to civil litigation by the IRS.

The civil penalties can be quite harsh. For instance, the civil penalty for willfully failing to file an FBAR can be as high as a year in jail and the greater of $100,000 or 50% of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

Beginning with the 2011 tax year, a new form called Form 8938 – Statement of Specified Foreign Financial Assets, needs to be filled out and attached to the annual income tax return. This form needs to be filed by U.S. taxpayers who have an interest in foreign financial assets including financial accounts, certain foreign securities and interests in foreign entities with an aggregate value exceeding $50,000. The penalty for failing to file form 8938 is s $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Statement of Specified Foreign Financial Assets. This form must be filed by all US cit­i­zens and green card hold­ers that meet the thresh­old for fil­ing. In many ways, Form 8938 is a dupli­ca­tion of the FBAR require­ments for Form TD F 90–22.1. The biggest dif­fer­ences are when, where, and how the infor­ma­tion is reported.

The thresholds are dif­fer­ent depending on where you live and your fil­ing sta­tus. The IRS broke the thresholds into two major cat­e­gories of fil­ers and three sub cat­e­gories with dif­fer­ent thresh­olds. There are also two dif­fer­ent thresh­olds for each cat­e­gory. Simple so far, right?

The two dif­fer­ent thresh­olds for each cat­e­gory are the value of your for­eign finan­cial assets on the last day of the year and the value of your for­eign finan­cial assets at any time dur­ing the year. We cre­ated a sim­ple out­line to show the fil­ing thresh­olds for all of the cat­e­gories. The out­line shows the Residency, Filing Status, Threshold for year-end value, and Threshold for a value dur­ing the year

United States — Single — $50,000 — $75,000
United States — Married Filing Joint — $100,000 — $150,000
United States — Married Filing Separate — $50,000 — $75,000

Foreign Country — Single — $200,000 — $300,000
Foreign Country — Married Filing Joint — $400,000 — $600,000
Foreign Country — Married Filing Separate — $200,000 — $300,000

Additional vari­ables are applied to each case including cur­rency exchange rates and types of finan­cial assets at the very least depending on the indi­vid­ual sit­u­a­tion.

There are a number of assets that must be reported including:

• Financial accounts held in a for­eign finan­cial insti­tu­tion (e.g. check­ing, sav­ings, pen­sion)
• Stock or secu­ri­ties issued by a non-US per­son or entity (e.g. stock traded on a for­eign stock exchange)
• Interest in a for­eign entity (e.g. own­er­ship in a part­ner­ship)
• Financial inter­est in any instru­ment or con­tract involv­ing a non-US per­son or entity.

Note that this reporting does not include physical assets such as your home or cars or artwork or jewelry, only your financial assets.

The services of an experienced international tax CPA and Attorney can help steer you through the most advantageous way to enter into compliance. Getting in touch with someone to discuss your unique situation is the most important first step you can take.